How Did the Aussie Fare in 2011?

The Aussie made huge waves this year as five major themes ruled price action. Let’s take a walk down memory lane and revisit the events that rocked the Aussie for the past 12 months.

1. Floods cause damage in the Land Down Under

The Australian dollar was off to a weak start as the flashfloods in Queensland posed an early challenge to the Australian economy. Analysts estimated that the damages amounted to roughly 20 million AUD, setting AUD/USD back by more than 400 pips at the start of the year.

Since the floods destroyed some of Australia’s coal mining facilities, the industry reported a 30% decline in output and a 15% decline in sales of Australia’s second largest commodity export. This was a huge blow to the export-driven Australian economy, which suffered a 1.2% drop in GDP for the first quarter of 2011.

2. Surge in commodity prices

Over the next few months, commodity prices soared through the roof, with gold prices successfully breaking above the $1500/ounce mark. This provided support for the Australian dollar, which moves in correlation with the price of gold.

On top of that, skyrocketing commodity prices meant higher inflation, which led market participants to speculate that central banks such as the RBA will have to hike interest rates soon in order to keep price levels in check. Although the RBA didn’t implement any rate hikes during the first half of the year, interest rate expectations were enough to drive AUD/USD up to the 1.1000 handle back then.

3. China’s aggressive monetary policy moves

In 2011, China officially overtook Japan as the world’s second largest economy and was foreseen by the IMF to overtake the U.S. in 2016. Since China is Australia’s number one trade partner, its economic performance and monetary policies have an impact on Australia and its currency.

However, since the People’s Bank of China (PBoC) grew increasingly concerned that inflation in their economy would soon spin out of control, they decided to step up their efforts in tightening monetary policy. Since the PBoC’s interest rate and RRR hikes were aimed at mopping up excess liquidity and taming their booming economy, these put a dent on Australia’s exports and weighed on the Aussie.

4. Risk aversion from the euro zone debt crisis and the threat of another recession

Towards the middle of the year, euro zone debt problems which were already present in 2010 dominated the newswires once again. This time around, it was the lack of agreement among the euro European leaders and the possibility of a euro zone break-up that kept risk-taking at bay.

As one of the higher-yielding currencies, the Australian dollar was hit hard by the safe-haven flows that ensued. It didn’t help that the U.S. also had to deal with debt problems of its own as their government failed to reach their deficit targets for the year and got slapped with a downgrade from S&P. With that, riskier assets such as equities crashed and prompted many to worry about the possibility of another global recession.

5. RBA cut interest rates… Twice!

The RBA cut interest rates by 0.25% in November and by another 0.25% in December, bringing their benchmark rate to 4.25% before the end of the year. According to RBA head Glenn Stevens, the main reason for these rate cuts was the weak inflation figures in Australia as their annual CPI dropped far below the central bank’s target.

Aside from that, Stevens also pointed out that there was a slowdown in hiring and consumer spending during the last quarter of the year. After all, Australia’s jobless rate jumped to 5.3% in December from its midyear levels at 4.9%, and this could continue to weigh on spending in the coming months.

Overall, it was a topsy-turvy year for the Australian dollar as it was pushed around by both positive and negative fundamental factors. For now, it looks like the Australian economy is still facing a lot of challenges which could carry on until 2012. As always, stay tuned for my updates on the events that could rock the Aussie’s world next year!

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